Argues that price cap regulation creates an incentive for the firm to supply a less than optimal level of quality, especially when accessprices are regulated. Explains that congestion is essentially another aspect of quality, one that depends on the relationship of demand to capacity. Holds that because the firm cannot convert reductions in congestion into higher revenue because its price is capped, the firm has an incentive to provide too little capacity and allow congestion to be inefficiently high.

Concessions for Infrastructure: A Guide to Their Design and AwardFinance, Public Sector, and Infrastructure Network, WTP 399, World Bank, Washington, D.C., 1998.
Kerf, Michael et al.

Provides a guide to the complex range of issues and options related to design, award, implementation, monitoring, and modification of concessions.

WATER

Government Opportunism and the Provision of Waterin Spilled Water: Institutional Commitment in the Provision of Water Services, edited by William Savedoff and Pablo Spiller. Washington, D.C.: Inter-American Development Bank, 1999, pp. 1-34.
Savedoff, William, and Pablo Spiller

Discusses the causes of leakage, linking the problem with issues of commitment, opportunism, and finances. Describes the political context of water services and determinants of becoming stuck in an equilibrium that provides poor service. Discusses how to overcome these problems and ways of sustaining success.

Discusses quality issues in the context of yardstick competition, monitoring, performance targets, assignment of risks and rewards, incentives in tariff policies, and the roles of regulatory, judicial, and political institutions.

States that regulation of quality is the most difficult problem regulators face because regulation breaks the nexus between price and quality. Further states that typically there is an attempt to identify what physical aspects of quality are important. Discusses relevant quality indicators and trade-offs.

State that quality of service regulation should relate to transactions between companies and customers (for example, accuracy of estimated bills and actual meter readings), continuity of supply (for example, planned or unplanned service, their duration, and low voltage levels), and voltage quality.

TELECOMMUNICATIONS

Details an overall assessment index that combines multiple dimensions of quality, assigns weights to them (based on importance to customers), and aggregates the weights into a single score. Explains that this approach simplifies review of the company’s performance and the company can be afforded flexibility to respond to technological advances and invest in those services that enhance its own self-interests and those of its customers.

Examines policies for linking service levels to prices. Considers incentives that regulation creates for service (formal linkages and regulatory lag), weighting measures, differentiating between operators, and parameters for water supply, sewage, customer service, and environmental.

Developing and Introducing Performance Standards

Core References

Describes a general framework in which performance indicators serve as “triggers” to amassing additional information. Explains that information must be reliable, verifiable, and subject to periodic review. Also explains that publishing findings of the company’s performance requires regulators to determine how that information should be imparted, the breadth of the disclosure, the intended audience, mitigating circumstances that might affect the data, which agency(s) has responsibility for ultimate oversight, and the timing of report releases.

Explains that one possible approach to regulating service quality is to collect and publish data on the company’s overall performance against a range of indicators, which may be most effective if there are several companies or if tougher price controls are threatened for the future unless standards improve. Describe a second method, which is to compensate consumers who are the victims of bad service. A third method is to include a direct link between the company’s allowable revenue and its quality of service in the price control formula, which may be particularly beneficial in areas unsuited to individual compensation payments, such as fluctuations in voltage.

Sectoral References

ELECTRICITY

Explains that quality-of-service standards and associated penalties and rewards may be phased-in over time; however with regulation by contract, standards may not be changed during a multi-year tariff period unless the changes were pre-specified at the beginning of the tariff period or are agreed to by the licensee. Considers how standards may be based on the licensee’s own past performance or the performance of other comparable licensees in the country and elsewhere in the world. Describes characteristics of a monitoring system and the system’s purpose. Explains that the licensees should be allowed to recover costs of quality and compliance in their tariffs.

Holds that performance standards should be set with respect to reliability, customer call centers, employee safety, and billing and customercomplaints. Recommends that measures and targets to improve service quality be consistent with the company’s business plan and long-term interests. States that in developing performance standards, an electric utility should: 1) understand its historic performance in order to develop an appropriate baseline for yardstick comparisons; 2) determine those areas where cost savings may be realized and quality may be approved; and 3) begin collecting information on service quality and develop measures to be used for benchmarking performance.

Describes sequential process for designing incentive schemes. Victoria, Australia, set minimum reliability standards for its distributors differentiating between short and long feeders, and in 2001 they plan to introduce quality incentives directly into the CPI – X price cap regulation as well as forcing payments to affected consumers. In South Australia, utilities receive points for quality achievements relative to specified targets.

Explains that to provide proper incentives, regulators should focus on all dimensions of quality that customers value directly and that can be expressed as objective, observable, and verifiable performance measures, not use comparative performance, establish a baseline, base the reward on the current level of quality, use a symmetric approach, consider capping rewards and penalties, and ensure that if an overall service quality index is used.

TELECOMMUNICATIONS

Provides a critique of the pass/fail minimum standards where regulators generally impose penalties for the performance of telephone companies below a targeted level but do not reward superior performance. In effect, they establish an asymmetric incentive system, giving companies little reason to surpass the minimum established benchmarks and respond effectively to technological changes in the industry.

States that key steps for establishing a framework for regulation of service quality include developing a matrix to derive relevant quality of service criteria, identifying methods of determining customers’ quality requirements and perceptions, identifying problems encountered in service-level agreements, outlining the process used by monitoring systems, identifying ways of protecting interconnected networks and testing interoperability, identifying cost drivers that contribute to network failures and heavy traffic congestion, and summarizing efforts of various organizations and countries to standardize measures for benchmarking purposes. Holds that regulators should publish quality information.

Key Words

Core References

Regulating QualityNote no. 221 in Public Policy for the Private Sector. Washington, D.C.: World Bank Group, October 2000.
Baker, Bill and Sophie Trémolet

State that quality is often a matter of consumer choice, so offering different levels of quality in such instances is equivalent to changing the economic value of the service, so the regulator should expect a different willingness to pay from each customer or group of customers. Recommends that regulators allow for the delivery of various price and quality bundles.

Explains that higher reliability can be achieved for customers who choose such an option for a higher price by providing them with a primary selective service where they have access to multiple feeders so they are less susceptible to one feeder failing. Further explains that reliability guarantees are another variant on the price/service-offering concept. Information asymmetries and the resulting free-rider problem create problems.

WATER

Examines policies for linking service levels to prices. Considers incentives that regulation creates for service (formal linkages and regulatory lag), weighting measures, differentiating between operators, and parameters for water supply, sewage, customer service, and environmental.

Penalties and Incentives for Compliance With QOS Standards

Core References

Provides a framework that regulators can use to monitor quality of service. Methods discussed for securing compliance with regulatory requirements include: comparative performing (benchmarking), enforcement of service standards through statutory penalties, price controls that include price adjustment mechanisms if performance falls below or exceeds benchmarks (depending upon whether a symmetric or asymmetric reward system is adopted), guaranteed payment requirements if performance fails to meet minimum standards, and prospective sanctions from courts or complaint handling bodies if the company’s performance results in loss or damages.

Examines policies for linking service levels to prices. Considers incentives that regulation creates for service (formal linkages and regulatory lag), weighting measures, differentiating between operators, and parameters for water supply, sewage, customer service, and environmental.

Sectoral References

ELECTRICITY

Explains that, after a phase-in period, sanctions or penalties may be imposed for failure to meet pre-specified quality-of-service standards. Penalties should be related to estimates of the disutility experienced by the customer (based, where feasible, on estimates of the cost to the customer of not being served) and the costs likely to be incurred by the licensee in meeting the standards. Rewards may be granted. Penalties may be paid to individual consumers or to a general fund, administered by the Commission, which can be used to provide subsidies to economically disadvantaged customers.

Explains that utilities in the U.K. have faced fines and forced compensation to consumers for failure to meet quality targets. At the time of publication, regulators in the U.K. planned to introduce a reward system based on performance relative to an estimated cost-quality frontier, though that plan was criticized for not taking account of consumer willingness to pay. The regulator of San Diego Gas & Electric used ‘performance-based ratemaking’, which uses financial incentives and disincentives to influence utility behavior in the desired direction.

Provides low- and middle- income countries guidance in the design and implementation of Public-Private Partnerships in the highway sector. Covers all types of road projects and both with and without private funding.

Provides context and guidance to public policymakers and railway executive managers to restructure the railways. Addressed are the distinct structural issues associated with rail enterprise reform, the design of specialized intermediary institutions that carry out much of the work of railway restructuring, and the management techniques that are appropriately adapted to railway reform and restructuring. Focuses on “best” methods and is built on seven case studies of recent railway restructuring efforts. The case studies cover Japan National Railway, New Zealand Railways, Argentina Railways, Swedish Railways, British Railways, and railroads in the United States, and Canadian Railways.

WATER

Examines policies for linking service levels to prices. Considers incentives that regulation creates for service (formal linkages and regulatory lag), weighting measures, differentiating between operators, and parameters for water supply, sewage, customer service, and environmental.

Incorporation of QOS Issues Into Price Reviews

Core References

Explains the conceptual attractiveness of linking changes in service quality levels to the price cap formula, but that such an approach could result in an oversupply or undersupply in quality levels if the marginal costs or benefits are estimated incorrectly and lead, in turn, to selection of an inappropriate quality coefficient in price cap formula. Identifies another problem, namely the difficulty of ensuring that all attributes of quality (since quality is multidimensional) are adequately captured in the price cap formula. Omission of any attribute might lead to quality deterioration.

Sectoral References

ELECTRICITY

State that rewards and penalties should reflect the marginal willingness to pay for quality while exceeding the marginal cost of supplying it, and in the first scheme penalties and rewards should be capped. These incentives should be included in the revenue cap of the form CPI – X + S, where S is a service quality parameter. Considers design issues.

Explains why quality standards, as part of privatization efforts, are generally set high for utility providers in developing countries. States that: (1) Regulator can authorize alternative providers to supply services at lower prices than the incumbent carrier; (2) Another option is to allow the carrier to offer diversified services assuming such services lend themselves to differentiated tariffs and the targeted group for the lower-price, lower-quality services can be identified; (3) Contracts between the government and provider should explicitly authorize flexible choice arrangements, including flexible payment arrangements, so that providers are not penalized for offering differentiated services.

Summarizes recent research on urban transport in 14 large African cities. Provides comprehensive overview of the state of urban transport in Africa, with a view to drawing out the main challenges facing the sector and illustrating the different ways in which these have been addressed.

Key Words

QOS Standards and the Poor

Core References

Regulating QualityNote no. 221 in Public Policy for the Private Sector. Washington, D.C.: World Bank Group, October 2000.
Baker, Bill and Sophie Trémolet

Explains that quality is often a matter of consumer choice. Furthermore, offering different levels of quality in such instances is equivalent to changing the economic value of the service, so the regulator should expect a different willingness to pay from each customer or group of customers. Explains that if a private provider wants to serve the poor and remain profitable, it must diversify its pricing or supply arrangements, or both. Also, while data on poor consumers is scant, studies suggest that they are willing to pay a higher percentage of their income for infrastructure services than the rich—a measure of their desire for service.

Explains why quality standards, as part of privatization efforts, are generally set high for utility providers in developing countries and that these higher standards often result in higher costs for services, thus reducing access of low-income households to those services. An example of a government’s agreement with alternative providers was an experiment in Buenos Aires in Barrio San Jorge. Residents paid a higher fee for water from the piped network or a lower fee for water drawn from groundwater sources that was too salty for drinking but was acceptable for other purposes.

Discusses access and affordability for the poor. Cheaper technologies and various financing/lending schemes can lower costs for serving the poor, which increases access and affordability. Examines Latin American experiences.

Sectoral References

ELECTRICITY

Says quality-of-service standards need not be uniform across all customer categories or geographic areas. Instead, standards should be based on customers’ preferences and their willingness to pay for the costs of providing the specified level of quality.

TRANSPORTATION

Connects the urban and transport strategies with a focus on poverty. Concentrates on the problems of the very poor, not only in relation to income, but also in terms of the broader dimensions of social exclusion. Offers a better common understanding of urban transportation problems in developing and transitional economies and to identify an urban transport strategy framework for national and city governments.

Describes how strategies and programs in the transport sector can be designed to make more efficient use of public resources, facilitate trade and other economic activity, foster competitive markets, and better serve users’ needs–in particular, expanding poor people’s access to services and opportunities.